Labour shortage and wage pressures expected to stick around longer - economist

Labour market shortages and ongoing wage pressures are expected to persist longer than the Reserve Bank is counting on.

The government recently eased immigration rules to allow in thousands of lower-paid migrants to fill jobs, but Westpac senior economist Mark Smith said the market was extremely stretched and that was unlikely to change for some time.

Employers were more likely to retain staff through the current economic downturn, than risk downsizing, he said.

"With currently the most acute shortages for both skilled and unskilled labour in a generation, firms are unlikely to shed staff unless they have to," Smith said, adding it would likely be difficult to recruit staff as the economy recovers.

"A period of labour hoarding looks more likely to us than wholesale job shedding."

The annual unemployment rate, which was currently at 3.3 percent, was likely to remain under the 4- to 4.5 percent rate longer than the Reserve Bank (RBNZ) expected, Smith said.

"The labour market is extremely stretched, with the population ageing and more people now leaving New Zealand than arriving," he said.

"This will likely result in persistently higher rates of domestically-generated inflation than the RBNZ view, consistent with the risk we have flagged in earlier research."

The tight labour market could prompt the RBNZ to be more restrictive when it came to official cash rate settings, which the ASB expected to peak at 4 percent in November, with rate cuts pencilled in for 2024, Smith said.

However, a protracted and severe economic downturn could change things, he said.